Further Oil Price Spikes Could Rekindle Recession Fears

Oil prices surged this week, pushing Brent Crude above $100 per barrel for the first time since July, and WTI Crude above $100 as well, following growing U.S.-Iran tensions. The tensions have prevented any talks of a deal, leading to the resurfacing of recession concerns after the early weeks of the Iran war.

Strategic oil reserves in the United States are at their lowest level since the early 1980s, and China has eased fuel export restrictions, increasing crude imports. However, fuel supply remains severely limited due to reduced flows through the Strait of Hormuz and refineries in the Middle East and Russia unable to compensate for the lost supply.

Higher fuel prices have led to increased prices for diesel and gasoline, with U.S. gasoline prices reaching a record high for this time of year. The stress on fuel markets, combined with rising Treasury yields and borrowing costs, has pushed the likelihood of a Fed interest rate hike to 72.4% before the next meeting, according to traders.

Jan Hatzius, Goldman Sachs Chief Economist, stated that the 12-month recession risk has been scaled back from a 30% chance in March to 15% now, but another shock could raise that figure again. The bank currently anticipates about 1.5% GDP growth for the second half of the year, but warns that another major shock, such as a spike in fuel prices, could significantly impact economic growth and consumer spending.